INVEST Fair 2010 tidbits
At the Invest Fair 2010 (Sunday), I attended two talks which interested me. One was on Exchange Traded Funds and the other, Market Outlook & Stock Picks.
I will share some takeaways from the ETF workshop, specifically on China shares as the underlying market.
As the liquidity of any ETF is driven by the underlying market liquidity (which the ETF tracks and NOT the ETF’s daily trading volume), investors would be wise to look closely at China market ETFs and distinguish between those investing primarily in the A-shares or those who cover H-shares & say Red Chips. This is since A-shares are usually traded by Chinese citizens and only on a limited participation basis by foreign investors through the Qualified Foreign Institutional Investor (QFII) scheme. A-shares are those of Chinese companies listed on Shanghai and Shenzhen exchanges, whilst H-shares are Chinese companies listed on the Hongkong Exchange. Red Chips are typically Chinese SOEs incorporated outside China and listed on HKSE.
Therefore, take for example the United SSE 50 China ETF by UOB Asset Management. It tracks the 50 largest stocks of good liquidity on the Shanghai exchange, and does this through synthetic replication via swap agreement with Rabobank Hongkong. As the underlying market liquidity may be affected by market movements or political circumstances, the QFII scheme’s quota would limit the creation and redemption of units. This typically give rise to a situation where the ETF trades at a premium to the NAV of the underlying market. One can compare the ask price vs the intraday NAV of A-share ETF to H-share ETF. It is no surprise that the H-share ETF price tracks closer to the iNav.
“Investors should also note that the investment quota of a QFII (a qualified foreign institutional investor able to participate in the China A-Shares) may be restricted, suspended or halted. Where insufficient investment quota is available, the supply of P-Notes, being the type of China A-Shares access product which the Fund will be investing into, will be affected and may result in the Fund being unable to create further Units (because the Fund is unable to purchase more P-Notes) and/or cause the Units to trade at a premium to its value. Further, as it is intended that the Fund will initially have one P-Notes issuer (being Rabobank), the Fund may be subject to over-concentration risks of having a single counterparty and be exposed to a higher level of risk than portfolios diversifying their holdings across different issuers. The Fund will also be subject to the credit risks of the P-Notes issuer(s). Such risks are more fully set out in the Fund’s prospectus together with other risks associated with an investment into the Units (including risks inherent in investing in the P-Notes).”
Another key issue is that of counterparty risk. Mentioned many times over, it is still important to pay attention to this. One key point is to understand how much collateral is posted in case of counterparty insolvency. One step further is to understand what are the type of collateral securities and how much is concentrated with any particular entity.
If we examine United SSE 50 China ETF and db x-Trackers CSI300 ETF (both are A-share ETFs), it is interesting to find out that UOBAM’s ETF is only collaterised between 66%-100% of its value by UOBAM and RaboBank HK, depending on use of the specific tranche of P-notes to gain exposure to A-shares. Details on pg 7 and 12 of Prospectus. Comparatively, db x-Trackers CSI300 ETF is more than 100% collaterised. Although it has close to 90% common stock in its collateral portfolio, this asset has to be backed by 120% margin. The margin for corporate bonds is 110% and 100% for government bonds as specified in its collateral criteria.
- hospitality e.g. CDL Hospitality Trust
- consumer (luxury) e.g. FJ Benjamin
- agriculture e.g. Sino Grandness
My impression is he remains bullish that the market is able to ride through the recent turbulence, not turmoil. Tourism numbers are expected to reach new highs and spinoffs from the visitor numbers and IR activities will not just invigorate the retail sector but also the general economy. The year is not over yet. The best is yet to be (perhaps).
